Taxing College Athletics

Treating revenue sport revenue as unrelated business income

I like listening to podcasts when commuting to work. One of my favorites is Bishop Robert Barron’s Word on Fire Show (another is his Sunday Sermon series).

Lately I’ve been catching up with some older shows, most notably a 12-part series he did on Cardinal John Henry Newman. Bishop Barron discussed each of Newman’s major works, including The Idea of a University.

In 1854, Newman was named Rector of the then-newly established Catholic University of Ireland. After a somewhat rocky tenure, he stepped down. Subsequently he published The Idea of a University as a statement of the educational philosophy he had tried to instill in the university.

Newman set out the core of his argument in a few short lines:

I say, a University, taken in its bare idea, and before we view it as an instrument of the Church, has this object and this mission; it contemplates neither moral impression nor mechanical production; it professes to exercise the mind neither in art nor in duty; its function is intellectual culture; here it may leave its scholars, and it has done its work when it has done as much as this. It educates the intellect to reason well in all matters, to reach out towards truth, and to grasp it.

Put another way, the purpose of a university is to instill the habits of the life of the mind.

I got to thinking about Newman and the purpose of a university when I read a recent article from The Athletic:¹

The impact of NIL on the NFL Draft has ramped up a bit more in each year of its existence, and no position has felt it more than quarterback.

In today’s world, it’s not a question of whether an underclassman quarterback with a Day 2 draft grade will make more money by staying in school, it’s how much more. Look no further than Ole Miss star Trinidad Chambliss, who continues to fight for another year in school.

In the linked article, we learn:

Chambliss and Ole Miss agreed to a new contract. The exact amount of the deal is unclear, but people familiar with the agreement have told The Athletic that Chambliss will be among the highest-paid quarterbacks in college football, which should put him in the $5 million-$6 million range of total compensation between name, image and likeness deals and revenue-sharing payments.

Good for him.

But is running what amounts to a multi-million dollar professional sports team what Newman had in mind for a university? Is paying a so-called student-athlete more money to play college sports than he would make in the pros what Newman had in mind?

In 2024, my employer’s athletic department ran a sports business that generated $100 million. It’s the equivalent of a middle market business. According to Google’s AI, “in the U.S., there are about 2,800 public companies over $100M in revenue, compared to roughly 18,000 private businesses of that size.” And that’s out of 36 million business in the U.S. In effect, UCLA has a subsidiary running a business that’s in the top 0.05% of American businesses by revenue.

All of which got me to thinking about the unrelated business income tax. The unrelated business income tax (UBIT) is a federal tax imposed on tax-exempt organizations — such as charities, universities, trade associations, and other nonprofits — when they earn income from activities that are not substantially related to their exempt purpose. Granted, universities have successfully argued that athletics is substantially related to their educational mission.

But is it really?

Thinking about all of this reminded me that my former University of Illinois College of Law colleague, Richard Kaplan, wrote an article all the way back in 1980 in which he argued that university sport revenues were unrelated business income.² There have been other articles subsequently, and its facts are out of date, but it remains IMHO the source and its policy arguments are even more relevant today as the amount of revenues and how they are spent in the NIL era are even more indicative of how revenue sports have become big and unrelated businesses.

Kaplan built his case on four indicators that revenue sports constitute a commercial trade or business rather than an educational activity:

Profitability. The empirical data showed that major athletic programs, particularly football and basketball at larger schools, regularly generated substantial profits. Notre Dame, Penn State, Florida, and Nebraska, for example, each netted between $814,000 and $2 million from football alone. For Kaplan, these profits were characteristic of a trade or business, not a charitable or educational enterprise.

Self-generated funding. State legislators and higher education policymakers consistently treated revenue sports as self-supporting “auxiliary enterprises,” categorically distinct from academic departments and intramural programs that receive state education funding. No academic department is expected to fund itself commercially. This institutional treatment, Kaplan argued, revealed that even the schools themselves regarded revenue sports as commercial ventures.

Broadcast revenues. The explosive growth of television rights fees — $29 million for football broadcast rights alone by 1979, plus $8.5 million for the NCAA basketball tournament — provided powerful commercial incentives to field teams. Even schools that never appeared on television could receive broadcast revenue through conference-sharing arrangements. Kaplan contended these receipts standing alone could supply the requisite profit motive.

Recruiting intensity. The pressure to field winning teams to maximize broadcast fees, gate receipts, and bowl game payouts had driven recruiting practices far beyond anything consistent with educational purposes, including falsifying academic records, offering illegal cash payments and gifts, and forging test scores. These excesses, Kaplan argued, were explicable only as the product of a commercially driven enterprise.

Kaplan then argued that even if one accepts some educational role for athletics, revenue sports fail the “contributes importantly” test for substantial relatedness to educational purposes:

Weak educational justification. Claims that athletics build character and develop virtues were empirically unsubstantiated. Sociologist Harry Edwards, after reviewing the literature, found either inconclusive evidence or no evidence for these propositions. The educational benefits claimed for athletics applied far more plausibly to physical education courses and intramurals than to commercially oriented intercollegiate competition.

Institutional signals disclaim educational status. Regional accreditation bodies do not review intercollegiate athletic programs (though they do review physical education facilities). State legislatures explicitly exclude revenue sports from education funding. Many programs operate with independent boards of directors insulated from faculty or administrative oversight. Kaplan treated all of this as an implicit institutional concession that these programs are not genuine educational undertakings.

Harm to athletes’ education. Rather than contributing to athletes’ education, revenue sports frequently undermined it. Athletes were channeled into trivial courses to maintain eligibility, awarded credit for courses they never attended, and graduated at far lower rates than non-athletes. For the vast majority of athletes who would never play professionally, college sports functioned as an alternative to education, not a component of it.

Scale disproportionate to any educational purpose. Even for programs that could demonstrate some educational contribution, the commercial scale of major revenue sports programs — national television contracts, independent boards, self-financing mandates — exceeded any plausible educational justification, meaning the programs could not “contribute importantly” to educational purposes within the meaning of the statute.

Conclusion

Revenue sports are not part of the mission of the university. They are an unrelated business activity. This becomes more and more true as TV revenues rise, coaches salaries rise, and NIL payments become ever larger. The idea that an athlete can make more money by staying in school that turning pro proves the point. It’s time to tax big time sports.

1. Even scholars need downtime.

2. Richard L. Kaplan, Intercollegiate Athletics and the Unrelated Business Income Tax, 80 Colum. L. Rev. 1430 (1980).